Transcript Foreign Market Entry and International Production CHAPTER 9

Foreign Market Entry and
International Production
CHAPTER 9
Reinert/Windows on the World Economy, 2005
Introduction

A favorite Japanese motorcycle in Vietnam is the Honda
Dream
 Was unaffordable by many Vietnamese households
 However, in late 1997, Honda began producing the Dream in
Vietnam in order to serve the Vietnamese market—a form of
international production
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Ways in which a firm can serve a foreign market
 Exports
 Foreign direct investment (FDI)
• Holding at least 10 to 25% (depending on the country) of the shares in a
foreign productive enterprise—implies a degree of management control
 Contracting a foreign firm to carry out production in that country
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Foreign Market Entry

Many ways in which a firm in one country
can interact with the world economy
 Trade and foreign direct investment are two of
the main types of international economic activity
 To develop an understanding of this menu of
options, need to cross over from the field of
international economics into the field of
international business
• Issue of foreign market entry
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Table 9.1 Foreign Market Entry of a HomeCountry Firm into a Foreign Market
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Foreign Market Entry

Consider Honda, the Japanese automotive and motorcycle
firm and producer of the Dream motorcycle
 Initially, suppose that Honda sells all of its motorcycle output
domestically
 Assume Honda eventually begins to contemplate exporting
motorcycles to other countries but has little experience with and
knowledge of international trade
 Options for foreign market entry
• Indirect trade mode

Relies on another firm such as an exporting house in Japan or an importing
house in a foreign country such as Vietnam to complete the trade
transaction
 Might give Honda some expertise and confidence that inspires it to
make a more firm commitment to exporting in a direct trade mode
 Undertakes the export/import transaction itself rather than relying on an
export or import house
 Takes on the research, marketing, and logistics requirements of the
trade transaction
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Foreign Market Entry
• Produce abroad

Lack of experience in global production might make it wary of carrying out
production itself in Vietnam
 Would lead to contractual modes of foreign market entry
 Sell a license to a Vietnamese firm to produce motorcycles
 Franchising
 More common in service and retail firms than in manufacturing
• FDI
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Greenfield FDI
 Establish a brand-new production facility in Vietnam that it fully owns
Acquisition FDI
 Buy all or part of the shares of an already-existing production facility in
Vietnam
 Must own enough shares to have corporate control
 Otherwise the investment is classified as indirect or portfolio investment
• Joint venture with a Vietnamese firm
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Choosing a Method

What prompts a firm to choose one type of foreign
market category over another?
 Factors included in making foreign market entry
decisions
• Degree of control
• Level of resource commitment
• Degree of dissemination risk

Possibility of a foreign partner firm obtaining technology or other
know-how from the home-country firm and exploiting it for its own
commercial advantage
 For example, Japanese companies quickly assimilated RCA’s
color TV technology once RCA licensed it to a number of
Japanese companies
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Choosing a Method

If a firm’s most important concern was
 Degree of control over the production and marketing
process
• Lead the firm towards an investment mode of foreign market
entry based on a subsidiary obtained either through greenfield or
acquisition investment
 Limiting resource commitment to low levels
• Consider either trade or contractual modes of foreign market
entry
 Low degree of dissemination risk
• Either trade or investment via a subsidiary would be the preferred
mode of entry

In most instances, firms have more than one
primary concern
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Table 9.2. Factors Influencing Choice
of Foreign Market Entry Mode
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Motivations for International
Production

Dunning (1993) identified four motivations for international production
 Resource seeking
• Natural or human resources

Has been a gradual shift away from this
 Market seeking
• International production might be necessary to adopt and tailor products to local
•
•
•
needs
International production might be required to effectively deliver a product, such as
financial services
International production might be required for a firm supplying intermediate
products to another firm opening up operations in a foreign country
Firms may locate where they expect demand to grow in the future
 Efficiency seeking
•
•
•
•
Economies of scale
Economies of scope
Firm-level economies
Most important for large, mature MNEs with a great deal of international
experience
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Motivations for International
Production
 Strategic asset seeking
• Acquiring productive assets as part of the strategic game among
competitors in an industry may involve
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Acquiring or collaborating with another to thwart a competitor from
doing so
Merging with a foreign rivals to strengthen joint capabilities
Acquiring a group of suppliers to corner the market for a particular
raw material
Gaining access over distribution outlets to better promote its own
brand of products
Buying out a firm producing a complementary range of goods or
services so it can offer its customers a more diversified range of
products
Joining forces with a local firm in the belief that it is in a better
position to secure contracts from the host government
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The Rise of Multinational Enterprises
and International Production

Early MNEs were part of the colonization efforts during the
16th and 17th centuries
 Included state-supported trading companies such as the British East
India Company, the Dutch East India Company, and the Royal
African Company
 Known as the age of merchant capitalism
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Industrial revolution in the 19th century led to industrial
capitalism
 British-based MNEs operating in India, China, Latin America, and
South Africa
• Involved in mining, plantation agriculture, finance, and shipping
 Japan became involved in MNE activity after the Meiji Restoration
• Industrial groups known as zaibatsu

Associated with trading companies known as sogo shosha
 Still exist in various forms today
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The Rise of Multinational Enterprises
and International Production

In the 20th century, industrial production grew more capital intensive
 Role of the production line and associated economies of scale grew more
important

Era of industrial capitalism gave way to managerial capitalism or
Fordism
 Center of innovative economic activity moved from Europe to the United
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States
Firm size increased
Business success became based on the ability to coordinate growing sets of
complementary activities
Depression that began in 1929 and the Second World War hurt most
forms of international economic activity
Post-war recovery further strengthened the role of US-based MNEs
 Technological advantage of US-based MNEs during the early post-war
period was the point of reference of the product life cycle theory
• Production is confined to the home base MNE during the early phases of product
•
life cycle
During later phases production can move to subsidiaries in foreign countries in
order to take advantage of lower labor costs
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Rise of Multinational Enterprises
and International Production
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The 1970s had the rise of industrial output in the newly
industrializing countries (NICs) of East Asia
 Especially Japan, Taiwan, and South Korea
 Many see this as new economic era known as post-Fordism or,
Toyotism
• Economies of scale have been replaced by flexibility as the progressive
element in manufacturing
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Use of information technologies in machines and operations
 Allow for more sophisticated control over the production process
Rise of industrial output was followed by a rise in FDI on the
part of East-Asian based MNEs
 Especially those based in Japan
• In 1960 Japan accounted for less than one percent of global FDI
• By 1975 Japan accounted for nearly six percent
• By 1995, Japan accounted for eleven percent of global outward FDI
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Table 9.3. Leading Sources of World Foreign
Direct Investment (percent of global, outward
FDI)
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Rise of Third World
Multinationals
Increasing FDI by MNEs with home bases in
developing countries
 Began in the mid-1980s
 Developing countries began, at that time, to relax
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restrictions on FDI capital outflows
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